acca p5 december 2015 exam

8/20/2019 acca p5 december 2015 exam

http://slidepdf.com/reader/full/acca-p5-december-2015-exam 1/13

Professional Level – Options Module

Time allowed

Reading and planning: 15 minutes

Writing: 3 hours

This question paper is divided into two sections:

Section A – This ONE question is compulsory and MUST be attempted

Section B – TWO questions ONLY to be attempted

Present Value and Annuity Tables are on pages 12 and 13.

Do NOT open this question paper until instructed by the supervisor.

During reading and planning time only the question paper may

be annotated. You must NOT write in your answer booklet until

instructed by the supervisor.

This question paper must not be removed from the examination hall. P

a p

e r

P 5

Advanced Performance

Management

September/December 2015

The Association of Chartered Certified Accountants



Section A – This ONE question is compulsory and MUST be attempted

1 Iron Chicken (IC) is a multinational business which manufactures commercial building control systems. Building

control systems include heating and air-conditioning systems, lighting controls, power and water monitoring and

security systems (e.g. keypad access, alarms and CCTV). IC’s manufacturing takes place at a number of factory sites

where some products have a long product life and are simple and mass-produced while other products are complex

and have a short product life due to changing technologies. IC’s mission statement is ‘to create value for shareholders

through control products which improve productivity, save energy and increase comfort and safety’.

A new chief executive officer (CEO) has been appointed to address a decline in IC’s share price in the last three years.

This CEO has identified that the business has grown through acquisition and as a result she stated, ‘senior

management have focused on making corporate deals and not making control systems.’ The CEO has declared that

the business must focus on optimising its value generation rather than just getting larger through acquisitions.

You are a performance management expert within IC. The CEO has tasked you with aiding her in aspects of her

improvement programme. First, she wants your views on the use of EVA™ as the key performance metric at IC. You

have been supplied with the current EVA™ calculation (Appendix 1) but there is some doubt about whether the junior

management accountant who has done this work was sufficiently trained in the method. So, the CEO needs you to

evaluate its accuracy and the assumptions which form part of the calculation.

Second, the CEO believes that the poor performance of the company can be addressed by ensuring that the mission

statement flows down into the performance management of the business. To that end, the following critical success

factors (CSFs) have been identified and the CEO wants you to suggest additional key performance indicators (KPIs)

for these.

CSF Associated current KPI

1. Greater staff productivity Units produced per labour hour

2. Reduction of wastage in production Power consumed per unit produced

3. Greater innovation of products Number of new products launched

Your suggestions should be in addition to these current KPIs.

Third, in order to improve performance, the CEO plans to implement initiatives associated with ‘lean’ manufacturing.

Specifically, there are three projects which have been suggested and the CEO needs your advice on these:

1. Move to just-in-time manufacturing

2. Use kaizen costing

3. Examine the costs of quality in achieving a ‘zero defects’ approach to manufacturing

The CEO has stated, ‘I need to know briefly how the improvement projects will meet the three CSFs and also how

they will impact on the existing three KPIs.’

Finally, the CEO requested, ‘You must tell me the implications of the improvement projects for our information systems

as I feel that they are not currently suitable for the plan that I have.’ The current information systems of the company

are based around the functional departments of the business such as manufacturing, marketing, finance and logistics.

Each department has developed its own system although all feed into the finance system which is the main one used

for strategic decision-making. In order that the department systems can all feed through to the current finance system,these current systems only handle quantitative data. The company is considering the implementation of a new

information system. This new system will introduce networking technology in order to bring together all of the

departmental systems into a new, single, corporate database.

3 [P.T.O.



Required:

Write a report to the CEO of Iron Chicken to:

(i) Evaluate the accuracy of the EVA™ calculation and the assumptions in Appendix 1. Advise the CEO on your

results, providing calculations as needed. (15 marks)

(ii) For each of the three critical success factors at IC, briefly explain a weakness of the current KPI associated

with that CSF and then provide a justified alternative KPI. (6 marks)

(iii) Explain what the three improvement projects are, how they will help to meet the CSFs at IC and comment

on the impact of each project on the existing three KPIs. (15 marks)

(iv) Assess the impact of the proposed, new information system on the three improvement projects.

(10 marks)

Professional marks will be awarded for the format, style and structure of the discussion of your answer.

(4 marks)

(50 marks)

4



Appendix 1

Economic value added Year ended 30 June 2015

$m Note

Operating profit 551·4

Add back

Non-cash expenses 15·1

Marketing capitalised 23·1 5Operating lease expenses 40·0

Less

Tax 134·8 6

Lost tax relief on interest 24·5 7––––––––

Net operating profit after tax (NOPAT) 470·3

Capital employed

From the statement of financial position 2,401·0 10

Marketing spend capitalised 23·1 5

Operating leases 115·0 8––––––––

Adjusted capital employed 2,539·1

WACC = (1/2 x 16%) + (1/2 x 6·8%) = 11·4%

EVA™ = NOPAT – (WACC x Capital employed) = 181

Assumptions and notes:

1 Debt/Equity 100·0%

2 Cost of equity 16·0%

3 Tax rate 30·0%

4 Cost of debt (pre-tax) 6·8%

5 There has been $23·1m of marketing spent each year for the last two years in order to build the brand of IC long

term.6 Tax paid in the year was $130m while the tax charged per the accounts was $134·8m.

7 Interest charged in the period was $81·6m.

Lost tax relief on this interest was 30% x $81·6m.

8 The operating leases have an average life of four years.

9 The only research and development spending identified in the last five years was $10m expensed during this

year on a new product.

The product has not been launched yet.

10 Capital employed during the period (from the statement of financial position):

Opening 2,282·0

Change in period 119·0–––––––

Closing 2,401·0

5 [P.T.O.



Section B – TWO questions ONLY to be attempted

2 Perkin manufactures electronic components for export worldwide, from factories in Ceeland, for use in smartphones

and hand held gaming devices. These two markets are supplied with similar components by two divisions, Phones

Division (P) and Gaming Division (G). Each division has its own selling, purchasing, IT and research and development

functions, but separate IT systems. Some manufacturing facilities, however, are shared between the two divisions.

Perkin’s corporate objective is to maximise shareholder wealth through innovation and continuous technologicalimprovement in its products. The manufacturers of smartphones and gaming devices, who use Perkin’s components,

update their products frequently and constantly compete with each other to launch models which are technically

superior.

Perkin has a well-established incremental budgeting process. Divisional managers forecast sales volumes and costs

months in advance of the budget year. These divisional budgets are then scrutinised by the main board, and revised

significantly by them in line with targets they have set for the business. The finalised budgets are often approved after

the start of the accounting year. Under pressure to deliver consistent returns to institutional shareholders, the board

does not tolerate failure by either division to achieve the planned net profit for the year once the budget is approved.

Last year’s results were poor compared to the annual budget. Divisional managers, who are appraised on the financial

performance of their own division, have complained about the length of time that the budgeting process takes and

that the performance of their divisions could have been better but was constrained by the budgets which were set forthem.

In P Division, managers had failed to anticipate the high popularity of a new smartphone model incorporating a large

screen designed for playing games, and had not made the necessary technical modifications to the division’s own

components. This was due to the high costs of doing so, which had not been budgeted for. Based on the original sales

forecast, P Division had already committed to manufacturing large quantities of the existing version of the component

and so had to heavily discount these in order to achieve the planned sales volumes.

A critical material in the manufacture of Perkin’s products is silver, which is a commodity which changes materially

in price according to worldwide supply and demand. During the year supplies of silver were reduced significantly for

a short period of time and G Division paid high prices to ensure continued supply. Managers of G Division were

unaware that P Division held large inventories of silver which they had purchased when the price was much lower.

Initially, G Division accurately forecasted demand for its components based on the previous years’ sales volumes plus

the historic annual growth rate of 5%. However, overall sales volumes were much lower than budgeted. This was due

to a fire at the factory of their main customer, which was then closed for part of the year. Reacting to this news,

managers at G Division took action to reduce costs, including closing one of the three R&D facilities in the division.

However, when the customer’s factory reopened, G Division was unwilling to recruit extra staff to cope with increased

demand; nor would P Division re-allocate shared manufacturing facilities to them, in case demand increased for its

own products later in the year. As a result, Perkin lost the prestigious preferred supplier status from their main

customer who was unhappy with G Division’s failure to effectively respond to the additional demand. The customer

had been forced to purchase a more expensive, though technically superior, component from an alternative

manufacturer.

The institutional shareholders’ representative, recently appointed to the board, has asked you as a performance

management expert for your advice. ‘We need to know whether Perkin’s budgeting process is appropriate for the

business, and how this contributed to last year’s poor performance’, she said, ‘and more importantly, how do we need

to change the process to prevent this happening in the future, such as a move to beyond budgeting.’

Required:

(a) Evaluate the weaknesses in Perkin’s current budgeting system and whether it is suitable for the environment

in which Perkin operates. (13 marks)

(b) Evaluate the impact on Perkin of moving to beyond budgeting. (12 marks)

(25 marks)

6



This is a blank page.

Question 3 begins on page 8.

7 [P.T.O.



3 Posie is a large business which manufactures furniture. It is made up of two autonomous divisions in Deeland. The

manufacturing division purchases raw materials from external suppliers, and performs all manufacturing and

packaging operations. All sales are made through the retail division which has 95 retail stores in Deeland, as well as

through Posie’s own well-developed website. Posie has retail operations in eight other countries as well as in Deeland.

These overseas businesses operate as independent subsidiaries within the Retail Division, each with their own IT and

accounting functions.

The furniture is sold in boxes for customers to assemble themselves. About 10% of the products sold by Posie arepurchased already packaged from other manufacturers. All deliveries are outsourced through a third party distribution

company.

Posie’s corporate objective is to maximise shareholder wealth by producing ‘attractive, functional furniture at low

prices’. This is how customers generally perceive the Posie brand. The CEO of Posie is concerned about increasing

levels of returns made by customers and increasing numbers of consumers complaining on online forums about

products purchased from Posie.

Concerned about the impact on the Posie brand and the cost-leadership strategy, the CEO has asked you as a

performance management expert to help Posie implement the six sigma technique to reduce the number of products

returned and in particular to define customers’ requirements and measure Posie’s existing performance. The

production director has been appointed to sponsor the project and you will be supported by a small team of managers

who have recently received training in six sigma. The board member responsible for manufacturing quality recently

resigned because she thought it was unfair that the manufacturing division was being held responsible for the

increased level of customer returns.

You have been given access to some information concerning the reasons why customers return goods to help you

measure existing performance in this area (Appendix 1). This is an extract from the management reporting pack

presented to the board at their monthly meetings. The returns data, however, are only compiled every six months due

to the lengthy analysis required of data from Posie’s overseas retail operations. It is included twice a year in the board

report along with the KPIs for customer satisfaction. The last time this information was produced 93% of customers

indicated they were satisfied with the quality of the manufacture of Posie’s products.

The CEO has heard that six sigma requires ‘large amounts of facts and data’. He suggested that the returns data

contain insufficient detail and that as part of your project you may need to do more analysis, for example, on whycustomers are not satisfied with the manufacturing quality.

He also added, ‘I’m not sure that our current IT systems are capable of generating the data we need to identify which

responsibility centres within the manufacturing division are the root causes of the problem of customer returns. We

are planning to change the designation of the overseas retail businesses from profit centres to revenue centres, but

again we need to know first how this will affect the information requirements of the business and any potential

problems with doing so.’

Appendix 1

Reasons given by customers for returning goods

Category Reason for return of goods % Responses

1 Difficult to assemble or pieces missing 48%2 Goods arrived damaged 14%

3 Goods were not as described or were defective 25%

4 Goods were of poor quality or no longer wanted 11%

5 Arrived late 2%

Total 100%

8



Required:

(a) Advise the board how the six sigma project at Posie to reduce returns from customers could be implemented

using DMAIC methodology. (15 marks)

(b) Evaluate the impact on Posie’s information requirements arising from:

(i) The need to identify and improve on the level of customer returns. (6 marks)

(ii) The proposed re-designation of the overseas subsidiaries from profit centres to revenue centres.

(4 marks)

(25 marks)

9 [P.T.O.



4 Soup operates passenger rail services in Deeland, a technologically advanced country, with high demand for fast

reliable rail travel from business and leisure passengers. Many passengers choose train travel because they see it as

less harmful to the environment than other forms of transport.

Soup’s main objective is to maximise shareholder wealth. Since becoming licensed to operate routes in Regions A and

B by the Deeland government five years ago, Soup has consistently delivered increased dividends and share prices

for investors. In its initial appraisal of the licensing opportunity, Soup expected to operate the routes for at least

15 years, however, their licence may not be renewed when it expires in three years’ time. The government has warnedSoup it ‘is unhappy about high returns to shareholders while there are many reports of poor passenger service,

overcrowded trains and unreliable services on certain routes and at busy times’.

Soup owns its fleet of diesel powered trains. Each train in Region A has seven coaches with 70 passenger seats

available per coach. In the less busy Region B, each train has six coaches each with 70 seats. As a condition of the

licence, Soup runs a set number of services at both busy and quieter times in both regions. Soup has two larger rivals,

both operating electric trains, which cause less harm to the environment than diesel powered trains. They run on the

same routes in both regions.

The government regulates fares charged to passengers, which are the same per distance travelled for every operator

in that region. The railway track, stations and other infrastructure are managed by the government which charges the

operators a fee. There are several stations along the route which are only used by Soup trains and others where Soup

trains do not stop at all.

Soup’s trains are 25 years old, originally purchased cheaply from an operator whose licence was withdrawn by the

government. Soup believes the low price it paid is a key competitive advantage enabling them to steadily increase

their return on capital employed, the company’s main performance measure, to a level well in excess of their rivals.

The shareholders are pleased with the growth in passenger numbers over the last five years, which is the other

performance measure Soup uses.

Soup’s ageing trains spend increasing time undergoing preventative maintenance, safety checks or repairs. A recent

television documentary also showed apparently poor conditions on board, such as defective heating and washroom

facilities and dirty, torn seating. Passengers complained in the programme of difficulties finding a seat, the unreliability

of accessing wireless internet services and even that the menu in the on-board cafe had not changed for five years.

Soup’s CEO responded that unreliable internet access arose from the rapid growth in passengers expecting to accessthe internet on trains. She said Soup had never received any formal complaints about the lack of choice in the

on-board cafe, nor had she heard of a recent press report that Soup’s trains were badly maintained, so causing harm

to the environment.

The CEO has asked you, as chief management accountant, for your advice. ‘In view of the government’s warning, we

must develop performance measures balancing the needs of passengers with the requirements of the shareholders’,

she has said. ‘I don’t want to know how to improve the actual performance of the business; that is the job of the

operational managers, nor do I just want a list of suggested performance measures. Instead I need to know why these

performance measures will help to improve the performance of Soup.’

The following data applies to Soup:

Region A Region BNumber of services per day

Peak times 4 4

Other times 6 8

Number of passengers per day

Peak times 2,500 1,400

Other times 2,450 1,850

10



Required:

(a) Advise the CEO on how the use of the balanced scorecard could improve the performance management

system of Soup. (10 marks)

(b) Using the performance data given, evaluate the comments of the Deeland government that Soups trains are

overcrowded. (7 marks)

(c) Assess the problems Soup may encounter in selecting and interpreting performance measures when applying

the balanced scorecard to its performance management system. (8 marks)

(25 marks)

11 [P.T.O.



12

Present Value Table

Present value of 1 i.e. (1 + r )–n

Where r = discount rate

n = number of periods until payment

Discount rate (r)

Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1

2 0·980 0·961 0·943 0·925 0·907 0·890 0·873 0·857 0·842 0·826 2

3 0·971 0·942 0·915 0·889 0·864 0·840 0·816 0·794 0·772 0·751 3

4 0·961 0·924 0·888 0·855 0·823 0·792 0·763 0·735 0·708 0·683 4

5 0·951 0·906 0·863 0·822 0·784 0·747 0·713 0·681 0·650 0·621 5

6 0·942 0·888 0·837 0·790 0·746 0·705 0·666 0·630 0·596 0·564 6

7 0·933 0·871 0·813 0·760 0·711 0·665 0·623 0·583 0·547 0·513 7 8 0·923 0·853 0·789 0·731 0·677 0·627 0·582 0·540 0·502 0·467 8

9 0·914 0·837 0·766 0·703 0·645 0·592 0·544 0·500 0·460 0·424 9

10 0·905 0·820 0·744 0·676 0·614 0·558 0·508 0·463 0·422 0·386 10

11 0·896 0·804 0·722 0·650 0·585 0·527 0·475 0·429 0·388 0·350 11

12 0·887 0·788 0·701 0·625 0·557 0·497 0·444 0·397 0·356 0·319 12

13 0·879 0·773 0·681 0·601 0·530 0·469 0·415 0·368 0·326 0·290 13

14 0·870 0·758 0·661 0·577 0·505 0·442 0·388 0·340 0·299 0·263 14

15 0·861 0·743 0·642 0·555 0·481 0·417 0·362 0·315 0·275 0·239 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1

2 0·812 0·797 0·783 0·769 0·756 0·743 0·731 0·718 0·706 0·694 2

3 0·731 0·712 0·693 0·675 0·658 0·641 0·624 0·609 0·593 0·579 3

4 0·659 0·636 0·613 0·592 0·572 0·552 0·534 0·516 0·499 0·482 4

5 0·593 0·567 0·543 0·519 0·497 0·476 0·456 0·437 0·419 0·402 5

6 0·535 0·507 0·480 0·456 0·432 0·410 0·390 0·370 0·352 0·335 6

7 0·482 0·452 0·425 0·400 0·376 0·354 0·333 0·314 0·296 0·279 7

8 0·434 0·404 0·376 0·351 0·327 0·305 0·285 0·266 0·249 0·233 8

9 0·391 0·361 0·333 0·308 0·284 0·263 0·243 0·225 0·209 0·194 9 10 0·352 0·322 0·295 0·270 0·247 0·227 0·208 0·191 0·176 0·162 10

11 0·317 0·287 0·261 0·237 0·215 0·195 0·178 0·162 0·148 0·135 11

12 0·286 0·257 0·231 0·208 0·187 0·168 0·152 0·137 0·124 0·112 12

13 0·258 0·229 0·204 0·182 0·163 0·145 0·130 0·116 0·104 0·093 13

14 0·232 0·205 0·181 0·160 0·141 0·125 0·111 0·099 0·088 0·078 14

15 0·209 0·183 0·160 0·140 0·123 0·108 0·095 0·084 0·074 0·065 15



13

Annuity Table

Present value of an annuity of 1 i.e.

Where r = discount rate

n = number of periods

Discount rate (r)

Periods

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 0·990 0·980 0·971 0·962 0·952 0·943 0·935 0·926 0·917 0·909 1

2 1·970 1·942 1·913 1·886 1·859 1·833 1·808 1·783 1·759 1·736 2

3 2·941 2·884 2·829 2·775 2·723 2·673 2·624 2·577 2·531 2·487 3

4 3·902 3·808 3·717 3·630 3·546 3·465 3·387 3·312 3·240 3·170 4

5 4·853 4·713 4·580 4·452 4·329 4·212 4·100 3·993 3·890 3·791 5

6 5·795 5·601 5·417 5·242 5·076 4·917 4·767 4·623 4·486 4·355 6

7 6·728 6·472 6·230 6·002 5·786 5·582 5·389 5·206 5·033 4·868 7

8 7·652 7·325 7·020 6·733 6·463 6·210 5·971 5·747 5·535 5·335 8

9 8·566 8·162 7·786 7·435 7·108 6·802 6·515 6·247 5·995 5·759 9

10 9·471 8·983 8·530 8·111 7·722 7·360 7·024 6·710 6·418 6·145 10

11 10·368 9·787 9·253 8·760 8·306 7·887 7·499 7·139 6·805 6·495 11

12 11·255 10·575 9·954 9·385 8·863 8·384 7·943 7·536 7·161 6·814 12

13 12·134 11·348 10·635 9·986 9·394 8·853 8·358 7·904 7·487 7·103 13

14 13·004 12·106 11·296 10·563 9·899 9·295 8·745 8·244 7·786 7·367 14

15 13·865 12·849 11·938 11·118 10·380 9·712 9·108 8·559 8·061 7·606 15

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

1 0·901 0·893 0·885 0·877 0·870 0·862 0·855 0·847 0·840 0·833 1

2 1·713 1·690 1·668 1·647 1·626 1·605 1·585 1·566 1·547 1·528 2

3 2·444 2·402 2·361 2·322 2·283 2·246 2·210 2·174 2·140 2·106 3

4 3·102 3·037 2·974 2·914 2·855 2·798 2·743 2·690 2·639 2·589 4

5 3·696 3·605 3·517 3·433 3·352 3·274 3·199 3·127 3·058 2·991 5

6 4·231 4·111 3·998 3·889 3·784 3·685 3·589 3·498 3·410 3·326 6

7 4·712 4·564 4·423 4·288 4·160 4·039 3·922 3·812 3·706 3·605 7

8 5·146 4·968 4·799 4·639 4·487 4·344 4·207 4·078 3·954 3·837 8 9 5·537 5·328 5·132 4·946 4·772 4·607 4·451 4·303 4·163 4·031 9

10 5·889 5·650 5·426 5·216 5·019 4·833 4·659 4·494 4·339 4·192 10

11 6·207 5·938 5·687 5·453 5·234 5·029 4·836 4·656 4·486 4·327 11

12 6·492 6·194 5·918 5·660 5·421 5·197 4·988 4·793 4·611 4·439 12

13 6·750 6·424 6·122 5·842 5·583 5·342 5·118 4·910 4·715 4·533 13

14 6·982 6·628 6·302 6·002 5·724 5·468 5·229 5·008 4·802 4·611 14

15 7·191 6·811 6·462 6·142 5·847 5·575 5·324 5·092 4·876 4·675 15

1 – (1 + r )–n

————––r

End of Question Paper

acca p5 december 2015 exam

Documents